The Simple Path to Wealth

How to Give like a Billionaire

I know what you’re thinking. For sometime now you’ve been wondering what exactly Mr. and Mrs. jlcollinsnh have in common with Bill and Melinda Gates. Here it is:

We both have Charitable Foundations

Now you’re thinking, “I knew it! jlcollinsnh is a billionaire!” In this you’d be, sadly I must say, mistaken. More monk than minister, I’m afraid.

The Gates Foundation Building

Our foundation has no building at all

We talk a lot on this blog about investing and building your own F-you Money stash. Very little time is spent on, well, spending it. Since we personally don’t much care for owning things we’ve not much to say. We like travel. We do spend on that. Sending our daughter to college is money well spent, as she is so thoroughly embracing the experience.

But the money we’ve spent that has provided us with the most pure pleasure is that we’ve been privileged to give away.

In fact, I can specifically pin-point the $1200 that has given us the most satisfaction return of all. I hesitate telling this story as it will be easy to read it as bragging when it’s only meant to illustrate. Hope you take it in that spirit.

Many years ago we attended a charitable auction held by the Catholic grammar school our daughter then attended. We had always been impressed with the teachers and the Mother Superior who ran the place.

One of our favorite local restaurants was Parkers. Parkers had donated for auction a gourmet dinner for ten. On the spur of the moment we decided to win it and gift it to the school’s teachers.

Bidding was spirited but as the amounts reached the actual cost of dinner for ten at Parkers, the competition dropped off. At around $1200 we were the winners.

When I gifted it to the Mother Superior I also gave her two obligations. First, she would have to choose which ten, of the about 15, teachers would get to go. Second, she herself would have to attend. See, we know this Mother Superior and needed to head off her selfless ways.

Parker stepped up

When word spread a couple of very interesting things happened. Parker stepped up and expanded his donation to dinner for 15 so everyone got to go. Another bidder offered to foot the bill for the wine.

Well, you know what happens when you mix fine food, wine and Catholic school teachers. Let’s just say, a good time was had by all, and leave it at that….

In addition to personal pleasure, one of the benefits of charitable giving is the tax deduction. Of course, to gain this benefit you must itemize your deductions on your tax return. But if you have less than $11,600 (Married and Filing Jointly. $5600 if Single) in itemized deductions you are better off taking the standard deduction and saving yourself the effort.

Five or six years ago it occurred to me that two life changes were coming down the pike that would affect my personal tax situation. We were planing to sell the house and I was planning to retire. Without the house and it’s associated deductible costs we’d no longer be itemizing. Upon retiring I’d be in a lower tax bracket. Both these things would be lowering the tax advantage of charitable giving. The solution:

You don’t have to be a billionaire. You can open your own foundation with as little as $25,000. Fancy building not included.

You get the tax deduction in the year you fund your foundation. So I got to take the tax benefits when they mattered most to me.

If you have stocks or mutual funds or other assets that have appreciated in value you can move these directly into your charitable foundation. You get the tax deduction for their full market value and you don’t have to pay any capital gains taxes on the gain. Double tax win and more $$ for your charities.

You can choose a variety of investment options so your donation grows tax free while waiting for you to allocate it.

You decide what charities receive your money, how much and when. You can set this up to happen automatically.

It keeps our personal names off the lists some charities sell to future solicitors.

In addition to the tax advantages this offers, it also plays into some of my conclusions regarding charitable giving:

It is best to concentrate your giving. We have selected two charities.

Giving small donations to many charities might be satisfying to you, but it dilutes the impact and a greater percent of your gift is eaten up in the processing of it.

Many small donations also gets you on many mailing lists.

Never give to phone solicitors.

The more I see a charity advertising, the less likely I am to believe they are focused on delivering my cash to those they claim to serve.

You need to do your homework. In addition to scams, lots of charities simply aren’t very efficient in delivering your dollars to those in need. You can check them out here: http://www.charitynavigator.org/

You don’t need a charity to help

There is also something to be said for giving outside the traditional, and tax-deductible, places. Helping your friends and neighbors directly isn’t deductible, but it has immediate benefits all around. This is something I’ll be trying to do more of in the coming years. Finally, while giving is a fine and pleasant thing, no one has an obligation to do so. Anyone who tells you differently is trying to sell you something, most likely the idea of giving to them and/or their pet projects. As individuals we only have one obligation to society: To make sure we, and our children, are not a burden to others. The rest is our personal choice. Make your own and make the world a far more interesting place. Addendum: For another great take on this approach, here’s Mrs. Paradise…

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Comments

Wow! Sounds like a fantastic way to make a big impact!
I have dreams of setting up some kind of foundation in my later years and had no idea it was that easy. Or that it could be done without millions of dollars.

one other thing I forgot to mention. If you have stocks or mutual funds or any assets that have appreciated in value you can move it directly into charitable foundation. You get the tax deduction for its full market value and you don’t have to pay any capital gains taxes on the gain.

I have to admit I don’t give as much to charity as I’d like, but as my income grows that will probably change. I do have to admit that I sort of think of all the unpaid overtime I work as charity to the homeless (I’m a social worker at a homeless shelter). I love that you won and gave that dinner to the teachers. My mom is a public school teacher and they deserve so much more credit then what they get. They are teaching and shaping tomorrow’s leaders after all.

Giving is, as you know, not just about money. I have a great friend from high school who retired and returned to school to get his masters in social work. It is a tough and often thankless field.

Each year I work as a volunteer with VITA (volunteer income tax assistance) helping lower income people complete their tax returns. It’s fun for me and I get to meet some interesting and wonderful people. Certainly shatters the common assumptions about the poor.

Wonderful article! Doing your homework is an important step to charitable giving. Vanguard Charitable is a great way to give to your favorite 501c3 charities and the homework is done for you! Jim..you did an excellent job relaying all the reasons why a donor-advised fund is a good option for philanthropy. Thanks for being such a great ambassador to giving!

Hi Jim-
Thanks for your informative article. As a social worker I am keenly interested in meaningful gifting – especially when considering current diminished funding in light of increasing demand.
Some thoughts from the book “Getting to Maybe: How the World is Changed,” by Westley, Zimmerman and Patton: think of the Grameen Bank model for microloans for entreprenurial start ups. Outcomes, accountability and tests of inference are important for established programs, but as a potential (micro) funder for start ups consider: (quoting from “Getting to Maybe…”):
1) Support learning as a meaningful outcome – and reporting on learning as a form of authentic accountability.
2)Create and nurture experimentation and learning about social change, especially failed policies and initiatives.
3) Support small “safe-fail” initiatives to learn what works and doesn’t work before implementing policy changes widely.
Thank you for your wrtiting and
thank you to your readers for their responses.
Fritz Hahn, Taos New Mexico

Thanks for the post. I may be crazy, or it may have something to do with me living in Canada, but I refuse to use charitable donations as a tax-break. It may be different in the US, but in Canada government does a pretty good job providing social assistance to all those in need. Yes, I am sure that there is some abuse, some people are lazy jerks who suck the system, but vast majority (maybe 98% of the money) goes to those in need. And yes, government on occasion does something ridiculous and often wastes money, but I bet that overall, they are more efficient than any non-profit organization could be.

Secondly, I must say that I disliked Bill Gates for a very long time – as a nerd, some of his moves did slow down the development of the new technology, some great things never took off as his inferior product simply steam-rolled over it… However, what he is doing now, not only with his own money, but also by having other billionaires donate even more – is nothing short of amazing. There are thousands of children in this world that are alive today thanks to his work and contribution.

yeah, I gather Canada throws a wider safety net than we do here in the US. Although a lot of tax dollars are spent on social causes here too.

The argument I’d make for charities over government in handling these things is that charities have to win you over to get your money. governments just take it. accordingly it seems to me the charities have more motivation to run efficiently.

that said, I think the even better choice is low key, local help provided to people and situations we can know personally. of course, here in the USA those kind are not deductible. that’s why I funded my foundation during my high tax/valuable deduction years. now, I’m free to do more of the more personal stuff and not worry about the deductions.

Bill Gates seems to be a person that others have very strong feelings about. As for me, he was just a good foil for this post.

Wise words. And they can only help make the world a better place! On reading, I originally thought that that Parker may be the wine guru, then realized that though he’s not, he is definitely a guru, and a very generous one at that. Inspiring story. Thanks.

Thank you so much, first of all, for your help on my questions and comment previously on consolidating my assets. I enjoy reading all your posts- they have a very unusual flair. I often find myself reading them over again and taking away different points.

I really appreciate your perspective on “giving”, not acting out of perceived duty, but out of sincere wish to benefit others. I was wondering if you can shed some light on my personal giving scenario:

I’ve been working regularly for approximately 8 years, have been working seriously hard on stashing my FU money since the beginning of this year and planning to work full time for no more than another 10-15 years.

I tithe a portion of my take home paycheck to the local church i go to (by choice), which comes out to 5k a year. I am not yet a registered member, still feeling the parish out- last year, they did not even bother sending me a tax receipt because I was “not registered”. Due to the location of this parish, there are some seriously wealthy patrons, including former domino farms pizza owner. So I am thinking of taking my contribution elsewhere. Obviously the funds at the moment is too small to start any kind of foundation; are there other options (aside from the uber-low-yield savings account at the bank I can contribute regularly and grow the money in, and donate a lump sum at the end of each year?

I also volunteer 60-70 hours a year, and regularly take donations in if for some reason i am not able to meet the tithe amount during a given month.

My first reaction is I’d instantly stop giving to any organization so unappreciative. 5k is a lot of money!

There are just too many wonderful options. Just click on the Charity Navigator link in the post and you’ll find plenty.

If the deduction is less important to you, as it is to me now, you might consider what I suggest at the end of the post: Direct and personal giving to friends, neighbors and local organizations whose work you value. These have little or no overhead or fund raising, so every penny goes to work helping.

As for where to keep the money until you donate, even as low as rates are, the bank account is still the place. As it is for any money you’ll be giving/spending/using in the next few years. Investing is long-term: 5 years minimum. Decades ideally.

Great post, never gave ‘starting a foundation’ any thought because I didn’t understand the benefits, but your post helps shed light on them. I love Charity Navigator, never make a donation without checking them out first, be sure to check their ranking!!

I don’t know how many times I’ve thought about a charitable trust fund. It’s been on my someday wish list. However, it’s my understanding that any money in the fund can only go to qualified non-profit or tax exempt organizations. Is that correct? Or can the money be used to help individuals in need? We give 10-12k a year to people rather than churches or organizations. I also prefer giving anonymously which calls for some creativity and using people out of state to help. It would be nice to have some of the advantages of a charitable trust fund.

There are are times when even a $5k charitable fund can be useful. It worked for us a couple of years ago when we wanted to sell some stock that had a significant capital gain. By funding our gift fund with that stock, we were able to shield the profit from taxes – worthwhile to us even though the amount was not much over $5k (but we did have other deductions).

Also – when looking at setting up one of these funds, note that both Vanguard and Fidelity charge an annual cost/maintenance fee.

My name is Josh, and I have an idea that I think can bring the FIRE community together and help starving children in Africa while providing evidence to support or reject the 4% SWR model.

I would like Wade Pfau, Mr. Money Mustache, Mad Fientist, and yourself to become board members of a Michigan-based 501c3. Together, we would:

1. Incorporate the 501c3.
2. Solicit donations from the FIRE community via our blogs for our 501c3 with a minimum target of $25,000 to open a Vanguard charitable fund.
3. Before the first annual report is due, we would dissolve the 501c3 and transfer all of the funds to the Vanguard charitable fund. We would pick how the funds are invested at the start.
4. We would set up the charitable fund to donate 4% each year to the charity that best serves our goal of feeding children in Africa.
5. We report out on the portfolio size each year and show that the 4% SWR model works (or not).

I will do the legwork to create the 501c3, write the Articles of Incorporation, and I can even donate $1000 (maybe by matching donations) to the 501c3 to get started. I can also provide conference calls for us to meet as needed.

Please let me know your thoughts, and feel free to contact me to discuss further. I already emailed Wade Pfau and Mr. Money Mustache, and I am going to try to find contact information Mad Fientist. If you have a way to contact him, I would love your help in getting him involved.

3. No matter what charity we select, there will be those who find fault.

4. Charities are imperfect organizations and, even using sites like Charity Navigator, not entirely transparent. When we chose to give to one on our own, we accept that risk. I’m not sure I’d be comfortable encouraging others to follow my lead into any specific charity.

5. I don’t think we’d prove anything regarding the 4% rule. The time horizon is simply too long for it to prove out and even then we’d only be proving that it worked, or not, for the year we started.

In any event, please keep me posted on your progress and the input of the others.

I realized that 2014 would most likely be my last year in the 33% (+9.3% state) marginal tax bracket, as I am drifting towards retirement, and this gave me the perfect solution to three problems. 1)I had a substantial sum in VGSIX that was worth roughly double my cost basis, 2)I felt that my asset allocation had too much exposure to RE, and 3)I earned more money in 2014 than I had anticipated, meaning I would probably get hit with a penalty for underpayment of estimated taxes. So I opened a Vanguard DAF last month and funded it with the VGSIX shares, and boom, all problems solved!

I’m a little confused by the vanguard charitable site. Do you have to donate to a 503(c) organization? I assume so as it is tax deductible?

I’ve had the thought of giving to some friend’s kid’s college expenses in the future, if/when I have the money. But this would obviously not be tax deductible. Would it be easiest just to do this out of cash, or could I set up some grant with $50k and give 4%/year? Would be cool to have my own: “Mr H’s educational grant for the advancement of science”! 🙂

For contributions other than those, you’ll need to fund from other sources and it it won’t be tax deductible. I once gave 25k to cover grad school expense for a friend in just this way. It’s a great thing to do. Getting a tax break isn’t the only thing. 🙂

Thank you for taking the time to share your knowledge and experience. I have been almost obsessively reading you articles and learning a ton and even some confirmation of decisions/thoughts I have made in the 10 years of my adult working life. The recent move from an amazing job to slightly less amazing job put me in search of what it would take to be FI and tighten up my financial life. As it turns out we have been living on about 50% of our take home pay and investing the rest and are only aprox three years away from having FU money and having the options that go along with it.

I am working on moving away from a financial adviser (with the 1% AUM fee and expensive funds) who was handling part of our investments and moving it to Betterment account, that I signed up from your article. Every year we give a minimum percent of our income to charity and this post has me researching donor advised funds and the option of transferring all our shares with capital gains into a Vanguard donor advised fund. The other option is to gift them directly to a charity. My question is: Since we will continue to gift that percentage of income (so a minimum specific $ amount) per year in the future could I systematically invest that money into Betterment and then once or twice per year gift that same amount to the donor advised fund using shares with capital gains and avoid the capital gain taxes and/or continue to raise the cost basis of my investment portfolio? Plausible effective strategy?

Again, thank you and sorry for the long-winded and beginner’s question.

The advantage of a donor advised fund is to concentrate your giving into a single year for tax purposes and yet still be able to distribute the money (or perhaps the money it earns) over multiple years.

If your plan is to give a certain amount every year, I don’t see the need for the middleman. Just give directly to the charity.

Big fan, having used several of them. I started with T. Rowe Price since that’s where my taxable fund was.

When I moved my money to Vanguard, I started a Vanguard DAF at Vanguardcharitable.com. I later realized that although the costs were lower than T. Rowe Price’s, the minimum grants were $500. I like to give smaller amounts to a wider array of mostly local charities. Like Josh Fire suggested, I treat mine like a nest egg, giving a little more than a 4% SWR, but maybe give 5% to 6% from it each year.

I discovered Fidelity Charitable, also mentioned in the comments above. Yes, it can be started with only $5,000, compared to Vanguard’s $25,000, but the bigger advantage for me is the $50 minimum grant. And the fees are nearly identical to Vanguard’s.

Last year, we gave from $100 to $1000 to 15 different charities, and I imagine we’ll exceed that this year. We give half of my blog revenue to charity, most of it via our Donor Advised Fund.

If you transfer money to your charitable fund directly from an IRA or 401k/403b you get the tax deduction on the amount and avoid capital cains taxes on any gain. Move money out of those accounts then reduces the amount of your RMDs when the time comes.

This is a much better way to make contributions rather than just out of cash flow you’ve paid taxes on already.

I just did this (set up a DAF) and it never never never would have occurred to me if I hadn’t read this post many months ago. This. Feels. Great! Thanks (again) jlcollinsnh for all your great practical advice that regular people can follow.